Effective Federal Tax Rates on Income from New Investments in Oil and Gas Extraction

Abstract

Accelerated tax depreciation (established by the Economic Recovery Tax Act of 1981, though partially rolled back by the Tax Equity and Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984) has led to substantially lower effective tax rates for business fixed investment. These changes suggest a reconsideration of the tax subsidy for oil extraction. The findings reported here suggest that the returns on integrated corporations' investments in the acquisition of oil and gas reserves are taxed at rates about the same as for investment in equipment, but considerably below rates applying to structures. Overall, oil extraction remains in a favored position. Recent changes in tax rules for oil and gas extraction have created differentials between producers in different circumstances. When percentage depletion is allowed, the tax benefits are so great as to create negative tax rates. Furthermore, individuals can largely avoid the adverse effects of the minimum tax on intangible drilling costs by capitalizing them and writing them off under the depreciation and investment tax credit rules that apply to equipment. 13 references, 3 tables.